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Competition law claims for benchmark manipulation

We consider which alleged competition law abuses by the banks are likely to lead to damages actions … and which are not.

In light of Brexit, the following has been amended from an article by Stephen Critchley, Head of Competition Law, that appeared in the New Law Journal in May 2016.

“Opt- out” class action claims

In recent years, the world’s leading banks have been accused of breaching the antitrust laws of the US, Europe and other jurisdictions.

Results have varied. In Europe, for instance:

the European Commission found the banks infringed Article 101 of the Treaty on the Functioning of the European Union by manipulating the EURIBOR and Yen LIBOR interest rate benchmarks; and

its investigation into foreign exchange trading (FX) is ongoing; whereas

other alleged benchmark manipulations - e.g. of ISDAfix and non-Yen Libor - have appeared to excite less interest from the Commission; and

it closed its investigation into credit default swaps (CDSs) without finding infringement.

On 1 October 2015, the Schedule 8 of the Consumer Rights Act 2015 came into force introducing an “opt out” collective proceedings regime in our Competition Appeal Tribunal (the CAT). The regime is similar to US class actions; appropriate for pursuing damages on behalf of large numbers of claimants, and seemingly ideal for banking abuses where total damages can be huge.

So what are the prospects of banking abuses being amongst the first opt out claims, or of being subject to claims at all? There are a number of problems.

Issue 1: few infringement decisions

UK courts are bound by the infringement decisions of European and UK competition regulators.

They will also continue to be bound by such decisions of the European Commission at least for the next two years, and quite possibly thereafter if the UK negotiates a minimal Brexit such as EEA/EFTA membership. Even if the UK opts for a full exit, it is unlikely to have retroactive effect on the abuses mentioned above, so the applicable law at the time of the infringement will continue to apply.

Class actions tend to be by clients who are drawn to the comparative ease of “follow-on” claims based on UK and European regulatory decisions, as they can proceed straight to issues of causation and quantum without the need to establish liability.

As noted, there may yet be an infringement decision by the European Commission concerning FX, but there will be none in CDS and no reason to expect one in ISDAfix or non-Yen LIBOR.

So far, of the above claims, currently only those relating to EURIBOR and Yen LIBOR could be brought on a follow-on basis as a result of EC decisions.

Issue 2: CAT Rule 119

There may be good grounds to bring “standalone” claims over CDS, LIBOR or ISDAfix. For instance, in a claim over LIBOR:

the EC Yen decision gives a firm footing to the contention that LIBOR manipulation infringes Article 101 as a matter of law; and

There is a wealth of evidence – including in the findings of financial regulators like the FCA – that USD and Sterling LIBOR were manipulated as a matter of fact.

However, standalone claims which “arose before” 1 October 2015 may be time-barred in the CAT because of a (perhaps unintentional) wrinkle in its procedural rules. Rule 119 provides that the old Rules apply to claims which arose before 1 October, but the old Rules do not easily accommodate standalone actions because the CAT’s jurisdiction was limited to follow-on claims before that date.

Under the old Rules, claimants generally had to bring a claim within two years of the infringement decision becoming final, but there was a secondary provision to extend the period in some cases. With standalone claims, there is no infringement decision, so the only provision is the secondary one which, by itself, sets an extremely tight time limit. Claims over LIBOR, CDS or ISDAfix run a significant risk of falling foul of it, and the CAT is the only venue where collective actions can be brought.

Issue 3: problems with benchmark claims

(a) offsetting

Benchmark claims differ from typical cartel claims where competitors conspire to inflate their prices and victims lose to the extent they are overcharged, minus any loss they pass on by increasing their own prices.

Key features of benchmark manipulations are:

They tend to be driven by whatever is in the traders’ interests that day. Taking FX as an example:

On one day, the conspirators may have a large volume of $-to-€ orders so they manipulate the exchange rate benchmark - e.g. Reuters’ London 4pm fix - in one direction.

The next day, they may have a large €-to-$ orders, so they manipulate the fix the other way.

Unlike overcharging, not all customers suffer. The traders’ behaviour may be driven by one (or a few) “target” customers with large orders, and they seek to manipulate the fix to those customers’ detriment and their own benefit. Other benchmark users might, in fact, benefit from the manipulation.

Without traders’ chatroom transcripts, customers are unlikely to know if they were targeted. Even large orders might not be if, that day, there were equally large orders the other way. Suspicious customers might therefore have to invest legal costs in a claim which could get dashed on the disclosure of documents received as part of the court process.

An action by the victims of collateral damage would almost certainly have to be collective, and on the opt-out basis given that the identity of class members would probably not be known until disclosure of documents. The question then arises of whether they could claim damages without offsetting the days they benefitted.

There is no straightforward answer. If the claim can be fashioned as a series of discrete infringements rather than a single overarching conspiracy, there is no obvious reason to offset gains from a different infringement another day, but it is risky to suppose the CAT would permit such an outcome. Ordering the banks to pay sums in excess of the losses they inflicted – including to claimants who, on balance, might have benefitted from the infringement – would offend against the UK’s strictly compensatory principles.

If claimants had to offset their gains, the manipulation each day would have to be quantified, the damages pot would be far smaller, distributions from it could be tortuous to calculate with some claimants possibly discovering they were entitled to nothing; all raising questions as to how may would bother to come forward. Given such hurdles, the CAT may look at the class-certification criteria in Rule 79 and decline to certify it at all.

(b) quantification

Problems in quantifying the manipulation vary from one benchmark to the next. We are told by a leading economics consultancy that the data to quantify manipulation of FX fixes, whilst vast, is available and can be cleansed.

Quantifying LIBOR manipulation may be more challenging. LIBOR was not based on transactions, but on each panel bank’s estimation of what interest it would be charged if it borrowed that day.

Not only is it difficult to gauge the difference between the submitter’s mala fide estimate and what a bona fide estimate would have been, but also submissions in the top and bottom 25% were discounted so the most abusive would have had little or no impact on the rate.

Whilst it is true that there are class actionsin the US over the LIBOR, FX and ISDAfix, similar competition law claims over benchmark manipulation in the UK are less likely. The US has a more favourable environment including triple damages, no adverse costs risk, law firms financially geared to a “no win, no fee” business model, class actions not being limited to the competition law allegations, and a tried and tested flexible damages distribution model.

Non-benchmark claims – a better bet

Of greater potential are claims over collusion akin to traditional price-fixing. In this regard, Credit Default Swaps are of interest. In the US class action which settled in October 2015 for $1.9bn, plaintiffs who traded CDSs with the Defendant banks allege two such collusions:

That the banks acted together to reduce the transparency of CDS prices, enabling them to maintain bid/ask spreads – i.e. the difference between a bank’s buy price and sell price – that were wider than would have been possible in a transparent environment.

That the banks conspired to frustrate attempts – principally by CME Group Inc. – to establish an exchange which would have permitted those wishing to buy and sell CDSs to trade directly with each other, as opposed to trading over-the-counter (“OTC”) with banks who buy and sell as a service for which they profit through the bid/ask spread which almost invariably makes OTC less attractive than exchange trading.

An English claim was likely prior to the European Commission’s closure of its investigation of the banks’ conduct in the CDS market. That has gone quiet, but a claim may yet revive.

The investigation closure does not preclude a standalone action. The US settlement came after the US Department of Justice effectively closed its investigation into CDS. Collective proceedings in the UK would face the additional hurdle of Rule 119, but it is not certain that a CDS claim would be time-barred under that rule even if it remains unchanged. It is widely suspected of being a drafting error.

Furthermore, although having closed its file on the banks, the European Commission is continuing its CDS investigation into two other defendants in the US class action; the International Swaps and Derivatives Association and the financial information provider Markit Group Limited. The likelihood of an infringement decision against ISDA and Markit reduced recently when the Commission announced it was considering commitments from them which could be accepted in lieu of a decision. However, the offer and acceptance of commitments would provide some footing for a standalone action.

Finally, there are rumours that progress in the Commission’s investigation into FX has been delayed because, in addition to benchmark fixing, it is looking at possible collusion over bid/ask spreads in that market too. The outcome of that investigation is therefore keenly awaited. If it results in a finding of infringement in setting bid/ask spreads, follow-on proceedings over that infringement may be the best bet of all given the sheer size of the market.